Here is my situation, I am losing my current job at the end of April. At that time, I will be receiving a separation bonus that equals my current annual salary. As of today, it appears that I might have a new job lined up right away.

I need advice for what to do with this bonus?

My wife and I currently have very little debt. We are in the position that if we take the majority (but not all) of our saving combined it with this bonus we can pay off our mortgage. I know that there are some negatives for doing this (i.e., losing the income tax deduction).

We also talked about putting a large amount into our boys Section 529 plans or other general investments, but with the way the market has been, I am so sure this would be the best place for this money.

I guess I would either buy rental property or buy an annuity for your boys. The annuity would depend on how old your boys are but it might help insulate them from the same predicament you're in... getting laid off with potentially no income

Okay, never trust the financial advice from random folks on the internet.

Quote:

Here is my situation, I am losing my current job at the end of April. At that time, I will be receiving a separation bonus that equals my current annual salary. As of today, it appears that I might have a new job lined up right away.

I need advice for what to do with this bonus?

My wife and I currently have very little debt. We are in the position that if we take the majority (but not all) of our saving combined it with this bonus we can pay off our mortgage. I know that there are some negatives for doing this (i.e., losing the income tax deduction).

We also talked about putting a large amount into our boys Section 529 plans or other general investments, but with the way the market has been, I am so sure this would be the best place for this money.

Any suggestions would be appreciated.

I won't tell you what YOU should do. I will tell you what I did:

Sit on the money until I was sure that my new job was stable. The last to be hired is often the first to get laid off. In this market the stability of all businesses are suspect.

Maintained more than a few months of expenses in liquid assets. Most as a CD ladder.

Avoided 529s in favor of general investments...although in this market cash is king.

Took that "getting laid off" paranoia as an opportunity to divest ourselves of some unneeded recurring expenses. Cable TV, cell phones, gym memberships, etc add up so canceling them for a few months until things looked solid gave us the chance to see what was really needed/desired and what was just stuff we paid for and hardly used.

If you accept the assumption that cash is king and you adhere to advice #1 then you have a few months in which to decide what to do as you put less than $100,000 in each different bank looking for less bad CD rates.

You then have breathing space in which to talk to a real financial advisor that can help you determine that at your current stage of life whether the tax benefits matter at all to you. How much do you exceed that standard deduction? If you are younger then there may be less benefit to paying off your mortgage.

The obvious downside in paying off your mortgage today is that it's not liquid at all in an emergency. So you have to determine if the delta between mortgage rate and what meager interest you can get is worth staying liquid.

The upside is that inflation won't really hurt you between keeping the money liquid or paying off your house. Regardless of the value of the dollar, your mortgage is dollar for dollar equal to that money sitting in the bank since they rise and fall together.

You know, thinking about it...I'd keep it liquid. The ability to pick up and move to a new job is worth a lot in this economy. With a year's salary in the bank you can soak up two mortgages until your current house sells if you both lose your jobs and the only job either of you can find is somewhere else. Or just try to tough it out on one salary until the economy recovers.

Q. think my quandary is not unique. Do I pay off deductible debt or hoard cash?
In other words, I can pay off my home and some business and investment notes with current cash, or I can keep on managing my debts while hoarding cash?

In this environment I am not sure what is proper, more cash or less debt. ---J.P., by email

A. Your quandary isnt unique. Indeed, my mailbag has been flooded with circle the wagons questions. How much liquidity you need depends on two major factors: (1) your personal situation and (2) your assessment of the world around you. The liquidity needs of a retired person are very different from those of a young family. Similarly, the needs of a securely employed person are very different from the needs of a contract worker.

Knowing what to do is complicated still more by the unspoken assumptions that some people carry around with them. Some people are so debt-averse that they will pay off debt even when the prudent course is to hold cash. Others seem to think they will never be offered the opportunity to borrow money again, so they are reluctant to pay off loans.

The hard measure, as I see it, is very simple. Exactly how long will your current liquid resources last if your earned income stops before you are forced to sell something or default on a debt? If you are a young worker who can easily change jobs even in a tough economy, you might need only a few months of spending in reserve cash. If you are an older worker, a higher-income worker, or an independent business person, your reserve need is probably at least six months and as many as 18 months.

Many retirees, on the other hand, dont need much in reserves because Social Security provides a large portion of their income. If, for instance, Social Security benefits cover half of your spending needs--- and they do that much, or more, for well over half of all retirees--- your reserve needs may be only a month of spending.

Note that I havent mentioned interest rates. Thats because what you earn on your reserve fund isnt very important when the concern is liquidity and security. Its nice when interest rates are high. Its tough when interest rates are low. But it shouldnt influence your decision about how much to keep in reserve.

Instead, decisions should be based on what payoff gives you the biggest bang for the buck. If the choice, for instance, is between using $3,000 to pay off an aging car loan where you are paying $500 a month or applying the same $3,000 to a home mortgage, you should pay off the car loan every time.

Reason: Applied to the car loan, $3,000 reduces your monthly cash need by $500 a month. Applying the same sum to your home mortgage has no effect on your monthly cash needs because the mortgage payments continue until the loan is paid off.

Okay, never trust the financial advice from random folks on the internet.

Sound advice in itself. I listen and verify all advice that sounds good to me. Sometimes its tough to see the forest through the trees, that is why I ask...

Thanks for you thoughts and the links...

In general, I am not a big fan of financial advisors though. In my experience with them, they just want to push their crap investments on to you. They never will suggest doing anything with your money that doesn't involve them...

Sound advice in itself. I listen and verify all advice that sounds good to me. Sometimes its tough to see the forest through the trees, that is why I ask...

Thanks for you thoughts and the links...

In general, I am not a big fan of financial advisors though. In my experience with them, they just want to push their crap investments on to you. They never will suggest doing anything with your money that doesn't involve them...

Thanks again.

Dave

Ah...well a tax accountant then. Someone who works for you for a fee (and not a wrap account)rather than on some commission basis. Yes, ones that work for large financial institutions mostly suck. Even friends and family ones.

Mostly you want a risk assessment, a decent asset allocation and good understanding of the tax implications of various options. Something you can do yourself but it's good to have a "professional" opinion. The issue is financial planning has no real certification requirements.

I like Burns because the couch potato portfolio (50% no load index, 50% bond) made sense to me, was something easy to do and it wasn't something he made money on. Plus I found many of his articles/analysis interesting. Like the one on how much you needed to invest to generate $1200 via interest per month. A heck of a lot more in 2009 than 2002.

Most radio financial hosts pay for the privilege in order to direct traffic to their business. Those annoy me because you never can really trust even their basic advice which makes listening to their show pointless.

1. Save (in an FDIC insured account) a good chunk of the separation bonus in case you don't get that job or lose it quickly (I think someone already mentioned this).

2. Put the money through dollar cost averaging in a low cost/tax deferred market investing vehicle. It could be a Vanguard type index fund, your 529 fund, or whatever. The market will rebound, but the problem is timing. By putting in a little by little consistently, you don't have to worry about the anxiety of trying to time the market.

1. Save (in an FDIC insured account) a good chunk of the separation bonus in case you don't get that job or lose it quickly (I think someone already mentioned this).

2. Put the money through dollar cost averaging in a low cost/tax deferred market investing vehicle. It could be a Vanguard type index fund, your 529 fund, or whatever. The market will rebound, but the problem is timing. By putting in a little by little consistently, you don't have to worry about the anxiety of trying to time the market.

Thanks for replying...

I decided that even if I get that job, I will wait 6 months to see what happens... I can continue and build a nice saving nest egg. If the new position seems to be working out, I will then pay off my house.

Dave

P.S. - Was the Performa 636CD your first Mac? My first Mac was the Performa 637CD - Money Magazine edition...

I decided that even if I get that job, I will wait 6 months to see what happens... I can continue and build a nice saving nest egg. If the new position seems to be working out, I will then pay off my house.

Dave

P.S. - Was the Performa 636CD your first Mac? My first Mac was the Performa 637CD - Money Magazine edition...

an overlooked asset in a world which promises dwindling supplies of water & food & clean land, not to mention space.

This is something I've chosen to do (get land) and am soon hoping to purchase my first land overseas in SE Asia.

Exactly right.
I'm doing the same. Those farmers, pockets of land can be put to excellent use. Non permanent structures can make excellent homes, technologies will provide excellent low power devices and free power generation through wind and solar. Digging deep into the ground for heat is starting to take off and spring water is abundant too.

"Islam is as dangerous in a man as rabies in a dog"~ Sir Winston Churchill. We are nurturing a nightmare that will haunt our children, and kill theirs.

I decided that even if I get that job, I will wait 6 months to see what happens... I can continue and build a nice saving nest egg. If the new position seems to be working out, I will then pay off my house.

Dave

P.S. - Was the Performa 636CD your first Mac? My first Mac was the Performa 637CD - Money Magazine edition...

Yes, the Performa 636CD was my first Mac. I miss playing games on that (Solarian II, Marathon, etc.)